Economic, political and social chaos

The economic, political and social crisis continues to deepen. Recession hit the economy in late 2013. Circumstances were harsh: electricity and water cuts, soaring inflation, price and foreign currency controls, shortages of imported goods and strong state interventionism which led to foreign investment flight and deterred international companies.

The fall in oil prices in late-2014 made things even worse. Oil accounts for more than 20% of GDP, 90% of exports and 40% of fiscal revenues. Although economic data has not been released since Q3-2015, we estimate the economy shrank by -18% in 2016, after -6.5% in 2015. GDP is expected to continue its downward spiral until 2018 at least, completing five consecutive years of recession.

At the same time, inflation is estimated to have soared above +1000% in 2016, the highest rate in the world. Hyperinflation was fueled by (i) high monetization of the public debt by the Central Bank; (ii) strong depreciation of the currency in both the official and black markets while 80% of goods consumed are imported; (iii) dramatic shortages of basic goods.

Major demonstrations against President Nicolas Maduro erupted after he had called for a “constituent assembly” to modify the Constitution and enlarge his powers. Confrontations with the police and the army have led to dozens of deaths.

Default seems to be a matter of time

The government dramatically lacks liquidity. The probability of default exceeds 50% over the next 12 months and reaches 95% for the next 5 years. A default on debt payments due in April and May was avoided thanks to the selling (at a huge discount) of governmental national oil company shares. A USD700mn payment, due in August and USD3.5bn that must be paid in October-November will once again put the country on the back burner. Foreign exchange reserves have fallen to USD10bn in May, a historic low. These do not cover even one month of imports. The country will benefit only partially from the gradual increase in oil prices as production capacity is capped by a chronic lack of investment. Venezuela produces today 2mn barrels/day, 80% less than in 2015.

Foreign exchange risk is immense. The government devalued the currency by 60% in May (to 2197.25VEF/USD), but the black market exchange rate continues to be four times higher.

Venezuela is one of the worst countries in the world to do business. The World Bank ranks it 187th out of 190 countries in its 2017 'Doing Business' survey, ahead of Libya, Eritrea and Somalia.